Why Investment Patterns Across States Hold the Key to India’s Growth Convergence

India’s economic resilience has stood out in recent years, but beneath the headline growth numbers lies a persistent fault line: wide disparities in performance across states. Per capita incomes differ sharply, as does the structure of economic activity. For India to realistically achieve its ambition of becoming a developed nation by 2047, growth cannot remain concentrated in a handful of regions. It must become broader, deeper, and more inclusive — and investment lies at the heart of that transition.

Why state-level convergence is a national imperative

National GDP is ultimately the sum of what states produce. If growth continues to be uneven, with richer states pulling ahead while poorer ones lag, India risks entrenching regional inequality. That is why economists have long focused on the question of convergence: are poorer states catching up with richer ones, or are gaps widening over time?

A key driver of convergence in any developing economy is investment. By expanding productive capacity, investment supports both supply and demand, creates jobs, and triggers spillovers across sectors. The challenge in India is that there is no official, long-term state-level investment series, making it harder to assess where and why capital is flowing.

What project data reveals about investment across states

One useful window comes from the capital expenditure database maintained by the Centre for Monitoring Indian Economy (CMIE). The database tracks large investment projects across most states, covering manufacturing, services and infrastructure, and including both government and private sector initiatives.

While this data focuses on larger, formally announced projects — and excludes smaller investments and some regions — it still offers valuable insights. Looking at cumulative new project announcements over a decade (2015–2024) smooths out year-to-year volatility and helps identify underlying patterns.

As expected, Maharashtra leads with over 15% of total announced investment. More striking, however, is the next tier: Gujarat, Andhra Pradesh, and Odisha together account for about 42% of total new investment — despite having very different income levels.

This diversity suggests that new investments are not flowing only to already rich states. Agglomeration advantages alone do not explain where capital is going.

The role of public investment: crowding in, not crowding out

To understand what does matter, one crucial factor is government investment. Economic theory offers two competing possibilities. Public investment can “crowd in” private investment by improving infrastructure, reducing costs, and raising returns. Alternatively, it can “crowd out” private investment if it absorbs scarce financial resources.

The Indian evidence strongly supports the first channel. When government investment and private investment announcements are aggregated at the state level over 2015–2024, the relationship is clearly positive. The correlation between public and private investment is a strikingly high 0.82.

In plain terms, states that invest more through their budgets and public-sector enterprises also tend to attract more private capital. Better roads, power, logistics and urban infrastructure lower transaction costs and make private projects more viable.

Governance, execution, and why completion matters

Investment decisions are shaped not just by announcements but by execution. A state that routinely struggles to complete projects sends a negative signal to future investors. Conversely, high levels of completed investment reflect administrative capacity, regulatory efficiency and a supportive business environment.

Using completed projects as a proxy for governance quality reveals another strong pattern. States with higher levels of finished investment also see higher levels of new investment — public and private combined. The correlation here is even stronger, at 0.89.

This suggests that investors pay close attention to outcomes, not intentions. The ability of a state to translate plans into operational assets matters as much as headline policy announcements.

What states can do to attract more investment

Two broad policy levers emerge from this analysis. First, states can actively augment public investment. Well-targeted capex creates infrastructure, generates positive externalities, and crowds in private capital. Second, states must institutionalise mechanisms that ensure projects — whether public or private — move from announcement to completion with minimal friction.

Together, these steps improve the overall investment climate. They also create forward and backward linkages that benefit the micro, small and medium enterprises sector, which often plugs into large projects as suppliers, contractors and service providers.

Why this matters for inclusive growth

If investment spreads more evenly across states, it can accelerate growth where incomes are currently low, supporting convergence over time. That, in turn, ensures that the gains from India’s growth story accrue to a wider set of regions, firms and households.

For a country aiming to be developed by 2047, the message is clear. Broad-based growth will not come automatically. It will be built state by state — through public investment that catalyses private capital, governance that delivers on promises, and an ecosystem that turns intentions into productive capacity.